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In 2004, ConocoPhillips updated its financial
strategy to better reflect the company’s
strong earnings results and the early achievement
of the goals it set at the time of the merger.
At the center of the strategy is continuous
improvement of financial strength and flexibility,
which will permit the company to compete
and excel in the global marketplace, among
the largest and most competitive group of
companies in the industry.
Aggressive debt reduction has been an important
part of the strategy. By year-end 2004, ConocoPhillips
decreased its debt-to-capital ratio to 26 percent.
Assuming the continuation of its strong operating
and financial performance, the company expects
to deliver ongoing shareholder value primarily
through equity growth rather than debt reduction.
Despite a more modest future debt-reduction
plan, averaging between $500 million and $1
billion annually, the company stretched its
future debt-to-capital target to the 20 percent
to 25 percent range.
In addition, by improving operating efficiency
and reliability as a means to grow and develop
around the world, ConocoPhillips continues
to redeploy significant amounts of its earnings
and cash flow to its business operations.
“We expect to realize strong returns and
continued volume growth on the investments we
make,” says John Carrig, executive vice
president, Finance, and chief financial officer. “We
use internal benchmarking to assess continuous
improvement in our operations, irrespective of what takes
place in the world. This allows us to invest
our money wisely and, ultimately, translates
to increased shareholder return.”
ConocoPhillips has provided shareholders with
consistent dividend increases in the past based
on its operating and financial performance
and expects to maintain annual dividend increases.
Since 2002, the compound annual dividend growth
rate has been 11.6 percent.
“Providing shareholders with regular dividend
rate increases reflects our commitment to a disciplined
dividend policy, as well as our systematic approach
to improving the company’s financial condition
and operational position,” explains Carrig.
To maintain a relatively constant number of shares
outstanding, ConocoPhillips announced a share
repurchase program in early 2005. The company
plans to offset the effects of dilution associated
with shares issued as a result of employee benefit
programs by repurchasing up to $1 billion of
the company’s
common stock over a period of up to two years. These purchases will be
made at the discretion of management with available cash.
ConocoPhillips benefits from a diversified,
integrated asset base. Its operating segments
provide an expanse of earnings and cash flow
sources for the company. Coupled with the
discipline and structure to maintain the
financial strategy, these businesses are
expected to deliver results for shareholders.
The company strives to achieve balance in
its major business segments by generating
earnings that are comparable to the capital
it employs. At year-end 2004, the capital
employed was about 60 percent in Exploration
and Production (E&P) and 30 percent in Refining and Marketing
(R&M). For the full year, earnings from
these businesses approximated these percentages,
roughly proportional to the capital devoted
to the respective segments.
Excluding discretionary expenditures for potential
additional investment in LUKOIL shares, the
capital budget for 2005 is $7.9 billion,
including capitalized interest and minority
interest. This amount includes approximately
$500 million to acquire an interest in a
joint venture with LUKOIL to develop oil
and gas resources in Russia’s Timan-Pechora
province. Capital budget funding will be
allocated to reflect the long-term strategy
to invest in further development of the E&P
business and selective growth in the R&M business.
The E&P portion of the capital budget
is approximately $6 billion. The amount allotted
to R&M
is approximately
$1.6 billion. The remainder, approximately
$0.3 billion, will be used for Emerging Businesses
and Corporate.
In addition to capital programs, ConocoPhillips
also continues to provide pension and employee
benefit funding.
In 2004, the company contributed approximately
$360 million to qualified U.S. pension and
employee benefit plans, and approximately $140
million to international plans. Over the 2005
to 2009 time period, pension funding is expected
to
be about $350 million per year for qualified
U.S. plans and $135 million per year for international
plans.
Finance personnel around the world are responsible
for ensuring timely and accurate financial
reporting, consistent with the requirements
in the countries in which the company operates.
In addition to maintaining compliance with
extensive accounting standards, employees implemented
the company’s compliance program in accordance
with Section 404 of the Sarbanes-Oxley Act,
as required in 2004.
“The accurate reflection of our financial
results can only be accomplished by people who
understand and can operate with the complex regulatory
standards to which modern business must adhere,” says
Carrig. “Being on the forefront of reporting
comprehensive and transparent financial results
is our objective. We believe this has earned
the trust of investors, and we will rise to the
challenge of maintaining that trust.”
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